WASHINGTON (AP) — Janet Yellen is now the clear front-runner to be nominated as chair of the powerful Federal Reserve and her status as President Barack Obama’s second choice, while awkward, could ultimately serve as an asset during confirmation and in the central bank’s top job.
Her supporters and some Fed watchers argue that Yellen will have more independence from the president in the autonomous Fed even as she helps him avoid the bruising and potentially losing confirmation fight he would have had with his first choice, Larry Summers.
Yellen, appointed by Obama three years ago as the Fed’s vice chair, is not as well known in the White House as Summers, a former Treasury secretary who counseled Obama through the economically crucial first two years of his presidency. If Yellen gets the top Fed job, she would be the first woman to hold that position.
Summers withdrew from consideration Sunday in the face of resistance from Democratic critics in the Senate, and by Wednesday the White House was signaling to Senate leaders that Yellen was now the front-runner, according to a senior congressional aide. A White House official described Yellen as the leading contender for the post. Both spoke on condition of anonymity because they were not authorized to reveal internal discussions by name.
In the past, Obama mentioned Donald Kohn, a former Fed vice chair, as a potential candidate. But Kohn, 70, has been considered a long shot. The term for Fed Chairman Ben Bernanke, first nominated by President George W. Bush and then renominated by Obama, expires Jan. 31.
While Summers would have been a close Obama ally at the Fed, the central bank is an independent agency that is supposed to operate outside the influence of the White House.
“Strangely, this could empower her at the end of the day,” said Cornelius Hurley, a former Fed counsel and now the director of the Center for Finance, Law and Policy at the Boston University School of Law. “All of her colleagues on the board and the Federal Open Market Committee will realize she is not a tool of this administration. If anything, she’s more independent as a result.”
The timing of Obama’s nomination remains uncertain. Congressional aides say that if Obama wants the Senate banking committee to act on the confirmation before the Senate takes a weeklong break on Oct. 14, he would have to announce his nomination sometime next week.
Any nomination would come at a crucial time for the Fed. The Fed board on Wednesday made a surprise decision not to reduce its stimulus for the U.S. economy and continued its program to buy $85 billion a month in bonds amid continued slow economic growth. Many Fed observers had expected the Fed to ease up on the bond purchases as it keeps an eye on inflation.
The Fed has two basic legally required goals: To promote maximum employment and to promote price stability.
Wednesday’s decision endorsed Yellen’s emphasis on the employment side of the Fed mandate and would likely be a point of inquiry during her confirmation, particularly from Republicans who hold a more hawkish view of monetary policy as a tool for keeping prices stable.
Summer’s prospects were hurt by liberal antipathy toward him and the White House’s late summer push in Congress for support of air strikes against Syria. Many liberals objected to Summer’s role in the Clinton administration’s decision to deregulate some financial practices which, they say, contributed to the 2008 financial meltdown. Also, Summers’ brusque manner alienated many lawmakers as well.
“It appears the White House stopped pushing Larry on the Hill several weeks ago when Syria became the issue,” said Rob Shapiro, a former undersecretary of commerce and economic adviser to President Bill Clinton. “They saw that they were going to have a great deal of difficulty maintaining Democratic support on Syria and that told them they had no political capital left for anything else. It was Syria that finally sunk him.”
Earlier in the summer, 20 Democratic senators signed a letter to Obama urging him to nominate Yellen. The letter did not mention Summers, but it implied the senators’ opposition to Summers’ nomination.
“The fact is that someone somewhere should have realized that there was at least one-third of the Democratic caucus that had serious concerns about his nomination,” said Jim Manley, a former top aide to Senate Democratic leader Harry Reid who has criticized the White House’s handling of the nomination. “Add to the fact that, in light of that, they would have had an unnecessarily divisive fight heading into the fall, where the president by all accounts holds the upper hand in budget negotiations with House and Senate Republicans. It was just a wasted exercise.”
Yellen is expected to have an easier time with confirmation if nominated, though she will face questions over when the Fed might begin to pull back on its bond purchase program. But while her views might be more liberal than that of Republicans, her more distant relationship with Obama might offer GOP senators some reassurance.
“Nobody ever rapped Bernanke for being too close to the White House,” Manley said. “That’s the way the Fed is supposed to operate.”
Yellen is credited for issuing early warnings while she was president of the San Francisco Federal Reserve Bank that the housing bubble and unregulated financial practices threatened the economy. As the Fed’s vice chair she has called for additional financial system safeguards.
Asked whether he was concerned that the political tone of the competition between Yellen and Summers hurt the Fed’s independence, Bernanke said at a news conference, “I think the Federal Reserve has strong institutional credibility. I’m not particularly concerned about the political environment.”
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